Geithner says Americans will have to SAVE more. But doesn’t the economy depend largely on consumers spending?
December 13th, 2011 | 
Author: Question by Pat: Geithner says Americans will have to SAVE more. But doesn’t the economy depend largely on consumers spending?
I know I am a financial idiot. I am trying to make sense of the mixed information I receive in the news. Like the article I just read that reports treasury secretary Geithner said Americans will have to save more in the coming months. This seems to conflict with the adage that 2/3 of the
ecomony depends on consumer spending. Please help me make sense of this. Thanks.
Best answer:
Answer by econgal
You are correct, overall spending needs to be strong to get us out of this mess, however, we need to spend within our means. People who have job security and growing real income can and should continue to spend. The rest of us must learn from the mistakes made by those who’s spending was falsely supported by debt. A simpler way of life needs to be re-established and our standard of living may not be what it used to be. Odd that the government does the very opposite of what they tell us to do.
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Yes, it is the case that in the U.S. 70% of the GDP had been coming from consumer spending. But you are missing the point:
1. This is much higher than the norm in other countries.
2. One reason is that other countries do save more.
http://www.msnbc.msn.com/id/11098797/
http://econ365.files.wordpress.com/2008/10/gross-savings-rate.pdf
http://books.google.com/books?id=-0n9n3vNMeYC&pg=PA218&lpg=PA218&dq=personal+saving+percentage+by+country&source=bl&ots=fPurhw6xq_&sig=V9W4Z-oMqJ3yD6cGAWcSWbglkPI&hl=en&ei=HA7USvmbL5CqtgOug8nHCg&sa=X&oi=book_result&ct=result&resnum=9&ved=0CCUQ6AEwCDgK#v=onepage&q=personal%20saving%20percentage%20by%20country&f=false
3. Money that is saved does not (generally) sit in a bank doing nothing. It is loaned out so companies can make investments – building new factories, buying new equipment, developing new products, etc.
That is, consumer savings become corporate investment.
http://en.wikipedia.org/wiki/Investment
That means:
1. The money does get spent and does add to the GDP.
2. It gets spent on things that make the economy more productive. The more productive the economy, the more it can produce with the same number of workers, the better off each worker can be.
So, saving now can lead to being better off later.
(I say “can” instead of “will” because there are all sorts of intermediate steps and benefits aren’t spread out equally. Real wages generally follow productivity, but haven’t been doing so in the U.S. for the past few decades.)
http://washingtonpolicywatch.org/2009/03/12/looking-past-the-banking-crisis-stagnating-real-wages-part-1-of-3/